Bootstrap Business Vs Funded Company. Now Choose!

Andy was under tremendous stress. He was not in his comfortable bootstrap business anymore.

In spite of the 24th month into his online startup, the tunnel was long and the light was nowhere in sight. His HR Manager told him that the company had problems paying the salaries of the 30 full-time programmers under his payroll. Just 6 months ago, Andy had no choice but to fire his close friend who was helping his company as a freelancer.

Things were very much different two years ago. Andy and his partners had just secured a $ 400,000 fund from a Japanese company that invests in internet businesses. Everything was falling into place as planned. A top executive from the same Japanese VC even resigned from the company to form a partnership with Andy in this new internet startup.

Bootstrap Financing

Both Andy and his Japanese partner are experienced, online entrepreneurs. Andy happens to be one of the pioneers in internet business that popularized the use of SEM (Search Engine Marketing) and SEO (Search Engine Optimization) in affiliate marketing in Singapore. Who would expect things to go wrong even when these two titans were to join forces in the app business? I mean, these guys eat, sleep and breathe internet, for God’s sake!

The experience left a deep scar in the way Andy views entrepreneurship. Prior to getting those Japanese funds, Andy was as carefree (I could use “happy”) as a lark. He answered to no one, except, maybe to his wife. He did everything as he deemed fit. Prior to dabbling in the internet business, he runs a successful fish food business as a sole proprietor. He still does. He needn’t dilute himself for public scrutiny, unlike after taking money from others.

Look here. I did not write the story above to scare you away from getting fundings. Neither am I trying to vouch for the way of a bootstrap business. My aim is for you to be more informed before jumping head over heels in love with the first suitor that appears. Read more about the different kind of funds before you proceed further.

Your business should continue in a bootstrap mode if …

YOU ARE COMFORTABLE WITH THE STATUS QUO

Now, not all businesses need to go global. Before Andy started his new venture into the mobile app business, he owned a fish food business. He started the fish food business after he made a windfall from the sales of an apartment that he bought by sheer good luck. There weren’t any investors involved in the business.

The husband and wife partnership was on a roll. Their new business coincided with the popularity of a new breed of ornamental fish that skyrocketed among the Chinese communities around the world. Andy’s business acumen enabled his new startup to capitalize on the trend. Their growth was enormous. Dealers from Indonesia, Singapore, and other South East Asia countries cam knocking on his door for distributorship rights.

His fish food business continued to flourish. Andy leads a carefree life for some good years before he became restless. Well, he gets his wishes granted, I guess.

YOU DON”T WANT TO ANSWER TO ANYONE AGAIN

Once you have taken business funding, you can kiss your 20-year business goal goodbye. As a corporate man for 10 years, I had tried warning Andy about what to expect when he took up the new challenge. Anyway, I did not expect him to listen though.

He expected himself to become the latest internet star when his team embarked on a grilling fundraising quest. I remember he used to tell me excitedly on his near misses in landing the few funds that he pitched during the earlier rounds. One thing for sure, you seldom become a business superstar by merely operating a regional bootstrap business. It doesn’t happen that way.

When he finally landed the $ 400,000 deal, he was overjoyed. I still recall how he announced his conquest on Facebook. I actually asked for an opportunity to work with him as a freelancer because of my new interest in the online business.

The fairy tale victory did not last long. The VC wanted Andy to submit performance reports regularly. The new company had to follow a series of metrics that measured their performance on a monthly basis. For the first time in his life, the entrepreneur had to work hard to achieve a set of lifeless KPIs. Not only that, they wanted him to report to a board and explained his every misses.

FREEDOM TO PIVOT

After two years of sleepless nights of worries, Andy and team finally decided that the business model was flawed. When they sounded out their findings and suggested to pivot from their original model, the VC went ballistic.

The Japanese summoned the partners to Japan for a tedious questioning about their decision. As a result of the meeting, Andy had to prepare a new business plan and a whole new series of short term KPIs for scrutiny. Not only that, talents were leaving their startup in droves due to never-ending cash flow problems.

After languishing in bouts of intense boardroom meetings, Andy decided that he had enough of those nonsenses. He made up his mind to revert the model back to a bootstrapping business model. He wanted full authority in deciding the next direction of his business legacy.

Instead of pitching for the next round of life-saving funds, they rebooted the whole business model. The funds did not come with no strings attached. Even with the $400K, Andy had given up a sizeable portion of the newco’s equity to the Japanese. If they get another round of funding, the partners would end up giving up more equity. No thanks to the company’s bad performance.

That’s the harsh reality of VC investment. No doubt, they want you to succeed, but usually not on your terms. Their business model always has an exit strategy. Founders seldom carry the same mantra. We always want the best for our startup.

As a result, Andy’s online business is currently in bootstrap mode. As they have tried to scale the project too fast in the past, they are now facing a monumental task to bring the game closer to home. It is easier to grow a lizard into a crocodile than the other way round!

But on the other hand, there are times you need to raise funds.

YOU WANT IS TO SELL OFF YOUR BUSINESS

It would be a great idea to get business fundings if you are in the game of selling businesses. Most serial entrepreneurs fit this bill. This breed will start a business, get bored, and go on to start another one. You can read more about them in this article from Investopedia.

Funded Company

It’s common sense. The modus operandi of a serial entrepreneur requires a vast amount of monies. A bootstrap model will never make the cut. The VC’s model of “arbitrage investing” works perfectly with the short term view of this kind of entrepreneurship. Both of them will simply cash out when their investment makes some money in the short term.

WHEN YOU HAVE AN ESTABLISHED PRODUCT LINE

The only time when you call the shots is when you own something the VC badly wants. This applies to local brands renowned in the region, like the famous energy drink, Red Bull.

Look here. I’m not saying that the Red Bull energy drink gets to where it is through the help of venture capitalist. Out of sheer luck, the drink was already well known among truck drivers. The best marketing campaign is always via the word of mouth. Imagine how the words spread when these drivers mingle among themselves when they go on their regular cross country spree.

Truth be told, if you have a brand like Red Bull, you don’t even need business fundings. But this is a great example of when to leverage on investment money. You gotta know the strength of your brand first before you can convince the VCs that you are merely giving them a chance to ride on a success. Your brand’s credential will determine who is the alpha; you or your investors.

As you can see, I am a total bias jerk when comes to choosing between a bootstrap business or a funded company. Honestly, how can I rid the bias after going through the first-hand experience of my friend in such predicament? In addition, trust the real-life stories of startups in Silicon Valley that receive business funds that span from the time of the dot com bubble. Borrow if you must but be vigilante when it comes to your company’s controlling stake.

32 comments / Add your comment below

  1. Interesting thoughts on the difference between Bootstrap and funded businesses. I’m slightly surprised that you think a bootstrap business will never make the cut!

    1. If you are talking about the speed into fame, a funded business with their Millions will definitely be faster than a conservative bootstrap business. Entrepreneurs who believe in bootstrap financing are after all, mostly conservative and thrifty. More often than not, fame is the last thing in our mind when we started the business anyway.

  2. This was a very interesting read, you never know when you start a business whether it will be successful or not. The bootstrap route is a tough and uneasy road to choose, you have to solely depend on yourself in most cases. However, when your business is funded you have more capital to make sure the business is successful. If the venture fails, you have a lot at stake and a lot more people to answer to. Not mention you’re giving up a great deal control of your company. It’s such a tough call to make, because neither option is a guaranteed success.

    1. It is a dilemma for any startup. Do not forget the objective of starting a business. If it’s about freedom, then you have to deliberate on how much you are willing to give up for fundings.

  3. Great article. This is a topic I know I need to learn more about and you really helped me understand some good ways to get started. Thank you.

  4. Bootstrapping in business means starting a business without external help or capital. However, Funding is the act of providing financial resources, usually in the form of money, or other values such as effort or time, to finance a need, program, and project, usually by an organization or company. Although I find your thoughts interesting if a bootstrap business works well they can be way successful.

    1. Yes sir. Bootstrap business is indeed a valid business model. Let’s face it. The reality is, failures happen to both, but more so if you are funded and yet fail to make enough profit.

  5. I don’t have much background knowledge in how to setup a business but this article was an interesting read. It provided good information about the pros and cons of both methods.

    1. One day, you might have a go in starting your own business. After reading this, I think you will be in a better position to decide which direction you wanna go.

    1. Business funding is the most critical aspect of any business. It’s high time you give this a thought. Btw, your blog is a bootstrap business in case you don’t know.

  6. Cool Story, is that a real one thou? Andy is a real person?
    I am also somewhat biased towards bootstrapping, I like the fact that you keep the majority of control and don’t have the classic report structures. The growth is also more sustainable and you can grow with the market, rather than forcing sometimes an unsustainable growth. But for some companies it made much sense to grow rapidly with external funds. I read recently the book “blitzscaling” and It showed quite nicely the big upside opportunity of this strategy, and when to use it and when not to.
    Good story, keep it up!

    1. Andy is a real person. He taught me everything I need to know about blogging. I was the freelancer Lol.
      You are absolutely right with your view bro. Via a bootstrap model, we need to force our business into a false growth so as to appease our “debtor”. A startup can be a total bliss for us when our our mental energy is focus on organic growth; cashflow, relationship, utilitarian…instead of having to pump up the balloon all the time. Hey bro, it’s great to see you here!

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